A dies with a £1.5m pension pot never drawn against. If this remains in the pot for the next generation, will it be their lifetime allowances that determine if the allowance is exceeded, or does it continue to be treated as A’s?
Simon Northcott
The short answer is that it is A’s lifetime allowance. The longer answer requires a slight digression:
In order to provide death benefits, it will be necessary (as some point) to ‘crystallise’ these funds by paying them as a lump sum or designating them as available for the payment of dependants’ or nominee’s flexi-access drawdown pension.
The crystallisation of previously uncrystallised funds following A’s death will be a BCE if (i) the crystallisation occurs within (broadly) two years of A’s death and (ii) A died before his 75th birthday.
On the occurrence of such a BCE, it is A’s lifetime allowance that is taken into account (and not the lifetime allowance of his death beneficiaries). This is because A is “the individual” referred to in FA 2004 ss.215 to 219 (see s.214(5)).
If the provision of death benefits is not a BCE (eg because A died on or after his 75th birthday) then the subsequent crystallisation of such funds is not taken into account for the purposes of any person’s lifetime allowance.
Matthew Harrison
Babbé LLP
Is it also correct that any drawdown/lump sum benefit for a nominee or dependant in these circumstances will be tax free and not affect the beneficiary’s own lifetime allowance?
Simon Northcott
If A died before his 75th birthday, the death benefits will not be subject to tax (other than a possible lifetime allowance charge: see below) provided that the uncrystallised funds lump sum death benefit is paid, or the dependants’/nominees’ flexi-access drawdown fund is created, within the relevant two year period (i.e. the period of two years beginning with the earlier of the day on which the scheme administrator first knew of A’s death and the day on which the scheme administrator could first reasonably have been expected to have known of it).
In relation to drawdown, this is the effect of ITEPA 2003 ss.579CZA(1) and (6) (I am assuming that A died on or after 3 December 2014). There is no express exemption applicable to the lump sum; it is not taxable because it is not made taxable by either ITEPA 2003 s.636A(4ZA) or FA 2004 s.206.
The payment of such a lump sum, or the creation of such a flexi-access drawdown fund, will be a BCE. The amount crystallising will be tested against A’s available lifetime allowance at that time. Any excess will be subject to a lifetime allowance charge. The dependant/nominee/recipient is liable for any such charge arising (FA 2004 s.217). The rate of the charge is 55% if paid as a lump sum or 25% on the creation of flexi-access drawdown fund, so the latter will usually be preferable.
Matthew Harrison
Babbé LLP